Smart ways to beat rate rises and mortgage stress



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By Andrea Sophocleous
October 2, 2009

Home ownership has long been touted as the great Australian dream, but for many it is an increasingly unattainable one . Sky-rocketing property prices have turned Australia into one of the most expensive housing markets in the world, expanding the size of the average mortgage and making repayments a monthly challenge.

Lower interest rates over the past 12 months have eased the pressure of repayments for home owners lucky to have kept their jobs, but unfortunately for some , the lowest rates in 40 years have not translated to ease of mind.

In the past year 55,362 families had to use mortgage payment holidays and hardship provisions offered by banks as they struggled to meet their mortgage repayments. In the first six months of this year, 3 , 260 houses were repossessed by banks in NSW alone, while in Victoria 3 , 068 homes were repossessed in the 12 months to June.

Ian Graham, chief executive officer of mortgage insurance company QBE Lenders’ Mortgage Insurance, says the incidence of hardship requests spiked in October last year, at the start of the global financial crisis, and increased again in May following an awareness campaign by the F ederal G overnment, reminding people of the availability of hardship provisions.

“The rise in hardship requests reflects the increase in unemployment,” Graham says.

“Ninety-five percent of all hardship requests are deserving, and the banks and QBE support them.”

Falling behind in your repayments or suffering mortgage stress (where more than 30 percent of your income is directed towards repayments) is a scary scenario for any family or individual, but being aware of your options can minimise the stress. Your lender can help you identify what options are available to you – many financial institutions offer a range of hardship provision options such as the postponement of mortgage repayments for up to 12 months, extending the term of the home loan, reducing repayments to cover the interest only, and the waiving of fees.

Extending the term of your loan will reduce the repayments you have to make, but it is worth noting you will end up paying a lot more interest in the long run. If you are considering this option, check whether it is easy to revert to a shorter term once you are back on your feet.

Another option is to switch to a ‘no-frills’ home loan with your lender, which could allow you access to a lower interest rate through a basic variable home loan. Yet another option is to refinance your home loan and switch lenders altogether, to a home loan with a more favourable variable interest.

For example, if your home loan is currently with one of the major four banks and you are paying a standard variable rate of 5.74 percent p.a, you could pocket the savings by switching to C ommonwealth Bank -owned Bank w est with a variable interest rate of 4.87 percent p.a.

Rates will vary depending upon the amount of money you want to borrow. H owever, remember to factor in costs associated with refinancing, such as exit fees from your existing lender and establishment fees from the new bank.

With interest rates tipped to increase as early as next week, many more families may find the need to use hardship provisions. Some economists are forecasting a rate rise by the Reserve Bank of 0.25 percentage points in both November and December. A 0.25 percent increase on the average mortgage of approximately $350,000 would add about $50 a month to repayments.

Graham thinks we’re unlikely to see a rise this year, but argues home owners should be prepared for multiple rises early next year. “The current interest rate settings are emergency settings. The Reserve Bank governor Glenn Stevens has been quite clear that rates are going to return to normal levels – which is what they would have been going into the global financial crisis,” he says.

“Interest rates dropped by about 2 percent , so we expect rates to rise 2 percent above current levels over the next 12 to 18 months.”

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